After experiencing high volatility through the session on Monday, the pound US dollar exchange rate closed just slightly lower than where it started. Brexit uncertainty and concerns over the health of the global economy sent the pair on a rollercoaster ride before finishing at US$1.3205. The pound is moving lower in early trade on Tuesday.
|What do these figures mean?|
|When measuring the value of a pair of currencies, one set equals 1 unit and the other shows the current equivalent. As the market moves, the amount will vary from minute to minute.For example, it could be written:1 GBP = 1.28934 USDHere, £1 is equivalent to approximately $1.29. This specifically measures the pound’s worth against the dollar. If the US dollar amount increases in this pairing, it’s positive for the pound. Or, if you were looking at it the other way around:1 USD = 0.77786 GBPIn this example, $1 is equivalent to approximately £0.78. This measures the US dollar’s worth versus the British pound. If the sterling number gets larger, it’s good news for the dollar.|
UK Prime Minister Theresa May’s Brexit deal is in pieces and trouble is brewing in Westminster. Theresa May took the decision to not put her deal for a third meaningful vote in Parliament, on the assumption that it would fail. Last night ministers voted 329 vs 302 to take control of the Brexit process. Parliament will hold a series of indicative votes on Wednesday. Ministers will vote on their preferred Brexit option. This opens the possibility of a much softer Brexit; a referendum or Brexit being cancelled.
|Why is a “soft” Brexit better for sterling than a “hard” Brexit?|
|A soft Brexit implies anything less than UK’s complete withdrawal from the EU. For example, it could mean the UK retains some form of membership to the European Union single market in exchange for some free movement of people, i.e. immigration. This is considered more positive than a “hard” Brexit, which is a full severance from the EU. The reason “soft” is considered more pound-friendly is because the economic impact would be lower. If there is less negative impact on the economy, foreign investors will continue to invest in the UK. As investment requires local currency, this increased demand for the pound then boosts its value.|
However, this is unlikely to be plane sailing. 3 ministers have resigned and there are callings for a general election as Theresa May’s authority in Parliament hits rock bottom. Investors will be following political developments closely. A general election at this time would increase political instability which would be pound negative.
The dollar traded broadly lower in the previous session as concerns of a more cautious Fed overshadowed Trump’s victory in the Mueller case. Fed policy maker Evans warned the markets that the Fed may have to ease monetary policy if the economic forecast for 2019 disappoints. His dovish stance convinced dollar investors that there would be no interest rate hike any time soon. This sent the dollar lower.
|Why do raised interest rates boost a currency’s value?|
|Interest rates are key to understanding exchange rate movements. Those who have large sums of money to invest want the highest return on their investments. Higher interest rate environments tend to offer higher yields. So, if the interest rate or at least the interest rate expectation of a country is relatively higher compared to another, then it attracts more foreign capital investment. Large corporations and investors need local currency to invest. More local currency used then boosts the demand of that currency, pushing the value higher.|
The pushing back of an interest rate hike, overshadowed news that the Mueller investigation concluded that there was no collusion between Trump and Russia in the Presidential election campaign. Analysts consider this to be a positive event for the dollar, as the risk of impeachment finally disappears.
Today sees a barrage of US economic data to be released. The most closely watched will be US consumer confidence. Analysts are predicting that this will tick higher. Should that be the case, the dollar could rally.
This publication is provided for general information purposes only and is not intended to cover every aspect of the topics with which it deals. It is not intended to amount to advice on which you should rely. You must obtain professional or specialist advice before taking, or refraining from, any action on the basis of the content in this publication. The information in this publication does not constitute legal, tax or other professional advice from TransferWise Inc., Currency Live or its affiliates. Prior results do not guarantee a similar outcome. We make no representations, warranties or guarantees, whether express or implied, that the content in the publication is accurate, complete or up to date. Consult our risk warning page for more details.
This article was initially published on TransferWise.com from the same author. The content at Currency Live is the sole opinion of the authors and in no way reflects the views of TransferWise Inc.